The Great American Condo Glut

After several years of gung-ho development in south Florida, San Diego, Las Vegas and other major markets, the once-hot condo market is headed for a slump.

The national median price for existing condos rang in at $228,200 in the fourth quarter of 2005 — a healthy 12.3% increase from a year ago, according to the National Association of Realtors. But in some of the most robust markets, where prices had soared in the past few years, appreciation slowed to a trickle:

– Condos in Atlanta went up just 3.7% year over year in the fourth quarter of 2005.

– Prices in San Diego bumped up just 1.7%.

– And in seven markets studied by NAR, such as Virginia Beach, Va. and Toledo, Ohio, prices actually dipped, mirroring the rest of the housing market.

Agents and economists say they expect to see further erosion this year, as the housing market continues to cool. “There is reason to be concerned about the condo market right now,” said Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School. “There is an all-time high of inventory right now and it is disproportional to condo markets,” she said.

Owners, builders feel the fallout

Sellers like John Robbins of Pompano Beach, Fla. say their properties are spending more time on the market. Two months ago, the securities trader listed his 2-bedroom unit for $220,000 — $25,000 less than what a similar condo sold for six months ago. It’s still on the market today. “I’m getting very little interest in it,” said Robbins.

Condo developers say they have been forced to throw in perks such as paid closing costs or association fees, extra kitchen upgrades or free hardwood floors.

“I don’t think there’s a market out there in which developers are not offering some kind of incentives,” said Arthur Nevid, managing director of Charlotte, N.C.-based Mountain Funding, which has financed $300 million condo projects in the U.S. over the last year. Mountain and many other lenders say they have ceased funding most condo projects and are backing away from some projects they had already committed to.

Some developers are even giving back the down payments or deposits paid by residents. At least four projects in Las Vegas, including the heavily advertised Icon Las Vegas, have been scrapped. “The reality is, is that the market has slowed,” said Robert H. Hamrick, president and CEO of Coldwell Banker Premier Realty in Las Vegas, “and properties have stopped appreciating in value.”

Too much, too fast

The condo boom started in most markets in 2003, after buyers snapped up much of the available condos on the market and sales and prices for condos were rising faster than in the rest of the housing market. That year, developers across the country started construction of 169,000 town homes and multi-family condo units, according to Census data, and sold 18,000 units of rental properties to condo converters, according to Real Capital Analytics in New York.

By 2005, new construction of town homes and condos had swelled 59% to 268,000 units, and 191,400 existing rental units were sold to converters — 34% of all apartment units sold. In markets across Florida such as Orlando, Palm Beach and Tampa, the percentage of apartments sold for condos was much higher, 75%, 81% and 60%, respectively.

“There were places where we had new supply go up 300% in a couple of years,” said Michael Carliner, economist with the National Association of Home Builders. “While there might have been a strong market initially, it’s very hard to absorb that new supply.”

1980’s all over again

There hasn’t been a condo boom like this one, economists say, since the late 1980’s when rising home prices and out-of-sight interest rates spurred developers to begin churning out a flood of condominiums. Many of these properties wound up back on the market, pushing prices down further.

Economists are concerned that this same pattern is repeating itself in markets such as Las Vegas, San Diego, and Miami, where investors, rather than residents have bought many of the units.

And more condos are being added this year, analysts say, putting more pressure on prices. In San Diego, 5,217 condo units were built since 2001, and another 7,235 are under construction or approved, according to Centre City Development Corp.

Meanwhile, sales and prices in San Diego have peaked, agents say, and prices are beginning to head south. In the city’s hot downtown area, condos’ price-per-square-foot dropped .2% in last year’s fourth quarter to $517, the first year-over-year drop since 2001, according to London Realty Group Advisors in San Diego. “It’s probably dropped off even more since then,” said company president Gary London.

Owners are now taking price cuts, or renting out their unit until the market improves. San Diego Realtor Cindy Davis is now leasing out a client’s condo that has lingered on the market for 80 days. “I’ve told him now he’s not going to get his price. Keeping it on the market and hoping for a miracle is stupid,” she said.

Likewise, Hamrick said, prices have stalled in Las Vegas, and are poised to dip, should more units come back on the market.

Sleepier towns not immune

Even low-key Minneapolis, has been rocked by a condo boom that is threatening to go bust. Last year, 1,326 units sold in the area — up from 557 the year before, according to the Minneapolis Area Association of Realtors. And there are currently 4,518 condos under construction or approved for downtown Minneapolis alone, said Mary Bujold, president of Minneapolis-based Maxfield Research.

Still many agents in Minneapolis believe their city’s luck will be different than such glitzy locales as Las Vegas and Miami. Residents, not investors, bought most of the properties here. And while sales have slowed, prices have not seen the spikes they have in other areas, making the market less susceptible to big price drops.

No question, “there are a lot of things to choose from,” and units are spending longer on the market, said agent David Abele with Edina Realty. Still, he said, this year is still shaping up to be a personal best in terms of sales. “People are just being more careful and more conservative,” with their purchases, he said.

Staying put? It’s a great time to buy.

Given the huge supply, agents say it might pay for sellers to hold properties off the market and let demand catch up. “This is not the time for a casual seller to place their product on the market,” in Las Vegas, Hamrick said.

Nor is it time for investors to try to make a quick buck. Units that were increasing in value 30% to 40% annually for the past several years are now stalled. “If you think it was a risky idea to flip one, two years ago, it would be an insane idea now,” the NAHB’s Carliner said.

Conversely, buyers might want to study the market for a few months to see if prices dip further. That’s what Robbins is planning. Once he sells his current condo, he says he will rent an apartment for six more months instead of quickly buying another unit. “By then hopefully it will be a buyers market,” he said.

Good for the long term

To be sure, most agents say they believe condos are a good bet in the long run, if they are well located. “I’m not a big believer in the bubble bursting,” Realtor Davis said. “There’s not much land here (in Southern California) and people still want to live here.”

If developers pull back on new construction, and the economy and interest rates remain on course, the supply issue could correct itself in many markets in about a year, said the Wharton School’s Wachter.

Longer term, Carliner thinks the percentage of baby boomers moving into retirement could also bode well for condos. Eighty percent of all condos in 2004 were owned by people 55 and up.

Ryan Higgins, for his part, was undeterred by declining condo prices. The 29-year-old broker and mortgage lender from Carlsbad, Calif., recently decided to buy a $585,000 three-bedroom condo in the chic La Costa area, despite seeing prices dip on many new projects. “Real estate is not a good short-term investment,” he said. “Anyone could have made money in real estate in the last few years.” Now, he said, you have to be patient, “buy in the right market and sustain some turbulence.”